Overview
The Volatility Breakout System is designed to capture large, explosive price moves that occur after periods of low volatility compression. Using proprietary volatility regime detection, the strategy identifies when markets are coiling for a major move and positions accordingly.
Strategy Logic
Volatility Compression Detection
The system monitors multiple volatility metrics in real-time:
- Bollinger Band Width — Identifies squeeze conditions when bands contract to historical lows
- ATR Percentile — Tracks current ATR relative to 90-day distribution
- Implied vs Realized Vol — Divergence signals imminent vol expansion
- Volume Profile — Declining volume during compression confirms the setup
Breakout Confirmation
Not all breakouts are equal. The system uses a 3-factor confirmation model:
- Price: Close above/below compression range with >= 1.5x average volume
- Volume: Volume spike must exceed 2 standard deviations above 20-day average
- Momentum: RSI divergence or MACD crossover must align with breakout direction
Position Sizing
The system uses a volatility-adjusted Kelly Criterion:
- Base size: Determined by ATR-based risk per trade
- Regime multiplier: Increases in low-vol breakouts (higher edge), decreases in high-vol environments
- Conviction scaling: Size increases with number of confirmation factors (1-3x)
Performance by Market Regime
| Regime | Return | Win Rate | Avg Trade |
|---|---|---|---|
| Low Vol Breakout | +42% | 78% | +4.2% |
| Trending | +68% | 73% | +2.8% |
| High Vol | +31% | 64% | +1.9% |
| Range-bound | +15% | 62% | +0.8% |
Risk Management
- Initial Stop: Placed at opposite end of compression range
- Trailing Stop: Activated at 2R profit, trails at 1.5x ATR
- Time Stop: Exit if breakout fails to follow through within 48 hours
- Max Loss Per Trade: 2% of portfolio
- Daily Loss Limit: 5% hard stop
The strategy has a lower win rate than our other systems but compensates with significantly larger average winners. The average win is 3.2x the average loss.